Business
Topics
There are, generally speaking,
three ways to buy a business: you can buy all the assets of the
business; you can buy the shares of the corporation that owns the assets
used in the business; or you can amalgamate a corporation which you
already own with the one that operates the business. Each method has
advantages and disadvantages, and the decision about which technique to
use is ordinarily based on business, tax, and legal considerations. Once
a decision has been made about how the business is to be purchased, a
written agreement is made.
In the case where the assets of
the business are to be purchased, the agreement refers to a number of
things such as:
- The purchase price
- The assets that are to be purchased and
the values allocated to ceratin classes of assets
- A mechanism for adjusting the purchase
price once final financial statements become available
- Conditions that have to be satisfied
ensuring that the seller is able to transfer title to the assets free
of claims by the creditors
- Whether the purchaser is to assume any
liabilities
- Where the assets are used in a business
that operates out of rented premises
- Whether the purchaser will obtain a new
lease, a sublease or an assignment of an existing lease, and who is
responsible for the costs associated with a transfer of a lease
- Where the business is operated under a
franchise, whether the purchaser is to assume the existing franchise
agreement, and who pays any costs associated with a transfer of the
franchise
In the case where the shares of the business
are to be purchased, the purchaser takes all the assets and all the
liabilities of the business, but the agreement still needs to refer to
many of the same things as in the previous example. The agreement will
also address:
-
How the shares are to be
transferred
-
How control over the business
is to be adjusted once final financial statements become available
-
Whether the purchase price is
to be adjusted once final financial statements become available
-
Conditions that have to be
satisfied, such as the buyer being able to examine and be satisfied
with any contracts that exist between the company and its suppliers,
as well as any franchise agreement or lease
Even where one buys a relatively
small business it may be worthwhile to obtain advice from an accountant
and a lawyer about how the purchase should proceed. There may be traps
for the unwary and opportunities to minimize taxes.
There are several reason for
incorporating a company. The decision whether to incorporate is usually
driven by income tax considerations and by the cost entailed in
incorporating a company. There are some other factors that should be
considered when deciding whether to incorporate. Some of these include:
Limited liability A corporation is a legal entity that is separate and
distinct from its shareholders. It is the corporation that owns and
operates the business and incurs the liabilities that relate to the
business. Protecting one's assets from the claims of creditors is a
good thing for people who operate a business. Operating a business can
be risky and using a corporation to conduct the business means that
one risks only those assets that are put into the corporation rather
than all of one's assets. Having to provide personal guarantees to
creditors negates the advantages of limited liability.
Perpetual succession A proprietorship or partnership ends when a proprietor
or partner dies. That can have adverse consequences, particularly from
a tax standpoint. Corporations do not die with their shareholders;
this means that planning can be done to ensure that incorporated
businesses continue after their founders have died.
Estate Planning Related to the notion of perpetual succession is the
fact that the share capital of a corporation can be structured so that
shareholders can tranfer some of their assets to their children during
their lifetime or at their death. A well designed share structure
allows one to maintain control over one's business while allowing some
or all of the growth of the company to be passed to successive
generations. It also permits income taxes and capital gains taxes to
be minimized, or at least deferred.
Profit sharing It is generally easier to implement a profit sharing
plan where there is a corporated vehicle. Employees can be given
shares in profits without the management powers and responsibilities
that are accorded to partners.
